Fitch: State Support for Banks Unchanged by
French Reform

Fitch Ratings-London/Paris-19 December 2012: France’s draft banking reform law is likely to leave the support dynamics unchanged for the country’s banks, Fitch Ratings says. A key aim of policymakers
is to preserve banking stability and the willingness to provide state support remains high. The French state recently provided aid to three institutions, Credit Immobilier de France Developpement, Banque
PSA Finance and Dexia.
The new draft legislation includes resolution regime language, which is in line with discussions at the European level. However, the French version does not include the bail-in of senior creditors. Instead, it would allow the French regulator to use a « guaranteed deposit and resolution fund » as part of a resolution plan.
We understand that, if this fund was called upon, shareholders and subordinated debt holders would lose money, but not senior creditors. This is consistent with the way subordinated, but not senior creditors, are being made to take losses in Spain’s bank restructurings. If European legislation is passed that includes bail-in of senior creditors, France would have to follow suit. Therefore, support dynamics could change across Europe in the longer-term.
The other key proposal is to isolate certain risky activities into separate subsidiaries by 2015. French banks would not be required to separate market-making activities according to draft legislation, unlike the recommendations from the European Commission Liikanen report. The French government appears to consider that such operations are necessary for serving customers. It has instead focused
on risky activities that are not linked to serving the real economy, such as proprietary trading.

Placing proprietary trading activities into separate subsidiaries would be neutral to slightly positive for bank credit profiles. It may reduce the downside risk as banks would not be obliged to support these
subsidiaries in case of problems, although some may still do so to avoid damaging reputational risk. The separation will have minimal impact at the consolidated group level.
If ring-fencing additional trading activities becomes a requirement under European legislation, France would have to comply. The banks most affected would be the Global Trading and Universal Banks,
two of which are domiciled in France – BNP Paribas and Societe Generale. Nevertheless, smaller capital market players in France may also be affected, for instance Credit Agricole and Groupe BPCE.
French banking reforms are expected to come into force in Q113, before any reform is decided at European level.

The draft text of the French law will be discussed on 19 December 2012.